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Lease Strategies

Product Overview

This LARG contains the following items:

Covering Non-Disturbance for the Subtenant Planning Major Improvements, and the Lease Clause Critique: Extended Excerpts From Three Agreements Documenting the Major Sublease.

Number of Single Spaced Pages: 12





This LARG looks at the concerns of the major subtenant taking a sizable chunk of space via a sublease deal, with plans to construct extensive improvements in the subleased premises. Such subtenants often can negotiate bargain rentals when they sublease "excess space" from companies in the midst of downsizing. Notwithstanding cheap rent, the sublease deal must contain non-disturbance protections and an agreement covering the proposed improvements. The first section focuses on non-disturbance. The Lease Clause Critique features numerous clauses for a major sublease with separate agreements for non-disturbance and construction of the improvements.

Covering Non-Disturbance for the Subtenant--Planning Major Improvements

Is the wave of downsizing and corporate cut-backs over? Don't bet on it. Major companies are still trying to cut expenses to become more competitive. And after initial efforts to cut costs have been completed, there's normally only one thing that can produce real cost savings.

Cut staff, and in particular, cut staff at the corporate headquarters. Many large companies continue to study, often quietly, how they can do more of just that. In some cases, cutting corporate head count has become a permanent feature in the job descriptions for senior management.

Get Rid of the Excess Space, Now!

If a company cuts large numbers of corporate staff from its leased facilities, what does that company do with the excess office space vacated by the "outplaced" employees? If the company can't give the space back to the landlord, and if the remaining term on the lease is long enough, it subleases the excess. Securing the approval of the landlord to such transfers normally is not a problem. Corporate tenants that have leased entire buildings or complexes usually had the kind of leverage to get broad assignment and sublease rights.

But what if the potential subtenant proposes major improvements for the subleased space, and the subtenant is willing to commit to a lengthy term needed to amortize them? And what if lots of space is involved? Mandatory Non-Disturbance Agreements

If a substantial subtenant plans to make significant improvements under a sublease, it must almost always get non-disturbance agreements from both the landlord and the landlord's lender, assuming the lender's financing is senior to the lease and the sublease.

Financing is normally senior to underlying leases on financed properties. This means that if the lender is ever required to foreclose on its loan, the junior leases and subleases will be terminated. When those possessory rights terminate, the subtenant's right to use and enjoy its improvements as well as the subleased premises containing them evaporates. This can happen even though the subtenant has been performing faultlessly under the sublease, and the foreclosure is triggered solely by the failure of the landlord to pay its loan payments. Consequently, the subtenant must have a non-disturbance agreement signed by the landlord's lender stating that if the lender forecloses and thereby steps into the role of the landlord, it will not disturb the subtenant's possession if the subtenant is not in default of the sublease. Since the lender is not a party to the lease or the sublease, this must be done in the form of a separate agreement.

For the same reason, the subtenant must have a non-disturbance agreement or attornment agreement from the landlord in case the lease between the landlord and the tenant terminates for some reason before the expiration of the sublease. Absent such an agreement, an early termination would also terminate the sublease, leaving the subtenant out in the cold. This is the case even when the termination of the lease is caused solely by the default of the tenant under the lease senior to the sublease, and even though the subtenant is not in default of the sublease.


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